National Winner: Low Income Planning

Name: Michael West CFP®

Licensee: AXA Financial Planning

Location: Geelong/Bacchus Marsh, Vic

Client situation

Maria* (52) first met with financial planner Michael West three years ago, desperately looking to refinance her home loan. She had just been divorced and lived with her two children, John* (then 14) and Mary* (then 16).

An in-depth discussion revealed the following:

1. As part of the settlement, Maria was awarded full ownership of the family home together with a $90,000 mortgage that she was required to take over.

2. Maria had been refused a replacement home loan due to overdue credit card debts of $1,000, overdue school fees of $13,000, overdue family loans of $15,000 and had child support of just $21 per month. At this stage she was considerably stressed and not enjoying good health.

3. Maria had not worked for the last 16 years and believed she would have difficulty getting a job. She had not updated her Will nor appointed a Power of Attorney and did not have any personal insurances in place.

4. Maria was awarded $280,000 super split as part of the divorce settlement, which had been rolled over to an existing old super fund.

Although the situation appeared hopeless, West suggested a full review of her overall situation rather than just trying to refinance the family home, but Maria was concerned that she could not pay for this advice.

Areas of advice

West was able to help his client in a number of ways.

It was agreed that financial planning fees would be based on a combination of fee-for-service and commission, subject to an agreed and satisfactory outcome. The scope of advice would look at her overall situation and make recommendations where practical in an easy to understand format.

On advice

A. West reversed the client’s ETP transfer payment back to the original source within the 14-day cooling off period for the super split monies of $280,000, then re-rolled to a new low cost superannuation fund that matched both her risk profile and insurance needs.

B. West withdrew the maximum non-restricted non-preserved component out of Maria’s new superannuation fund of $68,500 and placed it in her bank account.

C. A very old school scholarship fund was discovered with a cash value of $6,500 for Secondary Education purpose and another $7,000 for Tertiary purposes. After investigating the various options with this institution, West maximised the cash value and subsequently withdrew $6,500 and paid this also into Maria’s bank account. West left the Tertiary fund in place as the exit fees would have been prohibitive at that time.

With these cash monies totalling $75,000 now in the bank, Maria accepted West’s following recommendations:

> Paid out the credit card debt of $1,000 together with private school fees arrears of $13,000. West then set up a high interest Cash Management Trust (CMT) with an initial $26,000 to help pay for the school fees over the next two years paying upfront each year after obtaining a discount.

> Refinancing was arranged of the $90,000 loan on an interest only basis at a very competitive rate and placed $20,000 into a second CMT which would service the loan each month for the next three years with a small cash buffer included.

> Maria renegotiated her family loan of $15,000 to be paid out in full with all interest paid at age 55, as full payment was refused at that time.

> As per the client’s specific request, life insurance was put in place and the cover was accepted at standard rates, even though the client did have a medical condition. The premiums were deducted from the super fund to preserve cash flow with the lump sum to be used to payout the loan only, if premature death occurred.

> An appointment with Centrelink’s Financial Information Service officer was recommended, which resulted in an upgraded allowance of $11,000 per annum being paid and a review that increased the family tax benefit.

> Discussion was also taken on opportunities for Maria to get back into the workforce and encouragement was given for new work training via the local Centrelink office. Maria soon found part-time work at 25 hours per week providing a modest income, while still allowing time with the children after school.

In November 2006, when Maria turned 55 and could no longer find work, a partial redemption of $120,000 net from superannuation was withdrawn.

> The full $90,000 home loan was paid out and an additional $5,000 was used to renovate the electrical and plumbing system of her home that was in desperate need of upgrading to a safe level.

> The family loan of $17,700 was repaid.

> The balance of $7,300 was used as an emergency cash buffer.

> Maria decided to also cash in the $7,000 from the Tertiary Education Fund, as the children were not going to university but would do other training instead.

> Maria’s Will was upgraded and both Enduring and Medical power of attorneys were made.

The solution

1. Maria saved $14,000 in upfront fees, as West discovered the original super fund had a 5 per cent entry fee. By cancelling within the 14 day ‘free look’, the institution reversed the fee and reimbursed this money back to the superannuation account.

2. Amalgamating the earlier service period of the super funds should result in greater and more efficient tax planning going forward for later withdrawals.

3. The family home was retained and now has become unencumbered. This gave Maria the satisfaction of owning her own home without the threat of a mortgagee sale and the cash flow to pay the associated rates, bills and house and contents insurance. The electrical and plumbing systems had been upgraded to what was previously an unsafe and potentially dangerous home.

4. The children were able to remain in the private school system until they found full-time work in the later years. Maria was on the brink of pulling out her children from private school mid year due to her financial crisis. Not only were the children upset at this prospect, but also Maria herself was desperately concerned. The children, however, both found part-time jobs to supplement their mother’s fluctuating income while at school, and eventually found full-time jobs and training of their choice when they left.

5. The credit card remains in credit and a controlled planned budget has ensured all monies are accountable and Maria, for the first time in her life, is totally debt free.

6. Maria now retains her current life insurance for estate planning purposes even though she has no debts. She now understands the benefits of life insurance and the full financial planning process.

7. Her Will has been updated and both Enduring and Medical Power of Attorneys have been appointed to satisfy her estate planning needs.

8. Maria used $4,000 from the cash buffer in December 2006 to have a family holiday for the first time in five years.

9. Maria was very pleased to pay out the $15,000 family loan in the knowledge she was being both responsible and thankful for this opportunity to repay both the principal and accrued outstanding interest of $2,700.

10. Maria’s health has improved immensely with the comfort of being totally debt free and the children well educated.

Summary

The balance of Maria’s superannuation is still in place for retirement purposes. She is very pleased that her super fund monies have grown by $68,000 in a conservative portfolio in the last three years, as well as funding the life insurance premiums.

Centrelink is now paying a Newstart benefit of approximately $12,000 per annum while she is not working, as well as family tax benefits.

In consultation with the client, West was paid via a combination of ongoing trail and fee-for-service payments taken directly out of the super fund via the product provider to pay for this ongoing client relationship.

Maria subsequently feels no hesitation in phoning West for an appointment at her home at any mutually agreeable time to discuss any further needs at no extra cost to her. She understands she is paying for both ongoing portfolio monitoring and annual reviews in the form of an ongoing service fee combined with the fund manager’s trail commission.

Comments from the client

“I saved the family home and the children remained in private school at a time when I was desperate.

“I was able to become totally debt free and have a budget and financial plan that was structured. As such, my health improved considerably. That gave me the confidence to find new work and I still have the ability to contact my financial adviser at any time without hesitation.

“My outlook now looks very good compared to my earlier thoughts of doom and gloom.”

* Not their real names.